Free Retail Off-Exchange Forex Examination Practice Questions

Sample Practice Questions

Try these 10 sample questions from the Retail Off-Exchange Forex Examination practice bank. Each includes the answer and explanation. Continue with the interactive practice above to review the full question set.

1. 1A forex representative receives an American-terms quotation for sterling. Which units does this quotation express?

   1. A. U.S. dollars per British pound
   2. B. British pounds per U.S. dollar
   3. C. Euros per British pound
   4. D. British pounds per euro

   Answer: A

   Explanation: The Federal Reserve describes U.S. terms as "dollars per unit of foreign currency". For sterling, the foreign-currency unit is one British pound, so the quotation states its dollar price.

   Reference: Commercial Bank Examination Manual: International—Foreign Exchange — 7100.1, p. 1, opening quotation conventions

2. 2A dealer uses midpoint rates of USD 1.20 per euro and JPY 150 per dollar. Ignoring spreads and fees, what yen amount corresponds to EUR 10,000 through the dollar cross?

   1. A. JPY 1,250,000
   2. B. JPY 12,000
   3. C. JPY 1,800,000
   4. D. JPY 1,500,000

   Answer: C

   Explanation: The Federal Reserve explains that if a trader knows two dollar exchange rates, "the ‘‘chain’’ makes possible a calculation of the cross rates for Japanese yen against Swiss francs." Applying the same unit-cancellation method, EUR 10,000 × 1.20 = USD 12,000, then × 150 = JPY 1,800,000. Dividing by 1.20 gives 1,250,000; stopping after the first leg gives 12,000; omitting the first leg gives 1,500,000.

   Reference: Commercial Bank Examination Manual: International—Foreign Exchange — 7010.1, glossary entry Chain

3. 3A financially sound foreign counterparty has enough local currency to pay, but its government blocks conversion into the currency owed. Which risk has prevented payment?

   1. A. Operational risk
   2. B. Market liquidity risk
   3. C. Country transfer risk
   4. D. Interest rate risk

   Answer: C

   Explanation: The manual describes transfer risk when a country lacks foreign exchange or "has put restraints on its availability." The obstacle is a sovereign restriction, rather than a processing error, market depth problem, or rate mismatch.

   Reference: Commercial Bank Examination Manual: International—Foreign Exchange — 7040.1, p. 1, transfer-risk definition

4. 4A forex analyst reviews a U.S. goods export paid for from the foreign buyer's U.S. bank deposit. Under double-entry international accounting, which pair of entries records the transaction?

   1. A. Export debit and increase in U.S. liabilities
   2. B. Export credit and increase in U.S. liabilities
   3. C. Export debit and decrease in U.S. liabilities
   4. D. Export credit and decrease in U.S. liabilities

   Answer: D

   Explanation: BEA describes a U.S. export as a credit, with payment from the foreign buyer’s U.S. account recorded as an entry that "reduces U.S. liabilities to nonresidents". Spending down the nonresident’s deposit reduces the U.S. bank’s liability rather than increasing it.

   Reference: A Primer on the U.S. International Economic Accounts — Recording of Transactions in the ITAs, goods-export example

5. 5An FDM customer asks to keep an equal long and short position in the same currency pair in one account rather than offsetting them. How must the FDM treat those offsetting positions under NFA Rule 2-43(b)?

   1. A. Carry both until the customer chooses a closing date.
   2. B. Carry both if twice the normal deposit is maintained.
   3. C. Offset them rather than carry both in the account.
   4. D. Carry both if they have different ticket numbers.

   Answer: C

   Explanation: NFA states that FDMs "may not carry offsetting positions in a customer account". Extra collateral, separate tickets, or customer preference does not permit carrying the offsetting positions.

   Reference: NFA Compliance Rules — Rule 2-43(b), first sentence

6. 6A dealer reports an American-terms rate of USD 1.25 per unit of foreign currency. Ignoring spreads, what equivalent European-terms rate should a representative enter?

   1. A. 0.25 foreign units per USD
   2. B. 1.25 foreign units per USD
   3. C. 0.80 foreign units per USD
   4. D. 2.25 foreign units per USD

   Answer: C

   Explanation: The manual states, "A quote in European terms is simply the reciprocal of a quote in U.S. terms." Thus 1/1.25 = 0.80. The other values subtract one, retain the original rate, or add one instead of taking the reciprocal.

   Reference: Commercial Bank Examination Manual: International—Foreign Exchange — 7100.1, p. 1, quotation conventions

7. 7A customer sells EUR 100,000 for Swiss francs through USD. The dealer quotes EUR/USD 1.2000/1.2100 and USD/CHF 0.9000/0.9100, each as bid/ask. With no separate fee, how many francs does the customer receive?

   1. A. CHF 110,110
   2. B. CHF 108,000
   3. C. CHF 108,900
   4. D. CHF 109,200

   Answer: B

   Explanation: The manual defines bid rate as "The price at which the quoting party is prepared to purchase a currency or accept a deposit." The customer sells EUR at the first bid, receiving 100,000 × 1.2000 = USD 120,000, then sells USD at the second bid, receiving CHF 108,000. Using both asks gives 110,110; using only the first ask gives 108,900; using only the second ask gives 109,200.

   Reference: Commercial Bank Examination Manual: International—Foreign Exchange — 7010.1, glossary entries Bid rate and Chain

8. 8A U.S. forex firm deals with a domestic company whose revenues depend heavily on exports to one foreign country. Political disruption in that country threatens the company's ability to pay. How should the foreign-country connection be characterized?

   1. A. Indirect country risk
   2. B. Domestic operational risk
   3. C. Market liquidity risk
   4. D. Settlement timing risk

   Answer: A

   Explanation: The manual states that domestic counterparties dependent on foreign economic conditions "can pose an indirect country risk". The specified channel is foreign political disruption reducing a domestic counterparty’s export revenue. No processing failure, inability to trade promptly, or asynchronous exchange of principal is stated.

   Reference: Commercial Bank Examination Manual: International—Foreign Exchange — 7040.1, p. 3, indirect country risk

9. 9An analyst says a current-account deficit proves that the complete balance-of-payments accounts cannot balance in principle. Which accounting feature answers that claim?

   1. A. Double-entry recording of international transactions
   2. B. Seasonal adjustment of international transactions
   3. C. Market-price valuation of international transactions
   4. D. Accrual-basis recording of international transactions

   Answer: A

   Explanation: BEA describes "two equal and offsetting entries—a credit and a debit—for each transaction." Double-entry recording provides the counterpart to each component entry. Seasonal adjustment removes recurring seasonal patterns, market valuation sets transaction values, and accrual recording determines timing; those conventions do not by themselves supply the offsetting entries.

   Reference: A Primer on the U.S. International Economic Accounts — International Transactions Accounts—Overview and structure

10. 10An FDM customer holds four same-size long EUR/USD trades opened on Monday, Tuesday, Wednesday, and Thursday. A Friday sale offsets one of them, with no special customer instruction changing the ordinary rule. Which trade must be offset first?

    1. A. The Monday trade
    2. B. The Tuesday trade
    3. C. The Wednesday trade
    4. D. The Thursday trade

    Answer: A

    Explanation: NFA Rule 2-43(b) requires a "first-in, first-out basis." The Monday position is the oldest of the four same-size trades. Tuesday, Wednesday, and Thursday positions entered later; the stem invokes no same-size exception or other special instruction.

    Reference: NFA Compliance Rules — Rule 2-43(b), first sentence